How cautious can we afford to be about foreign investment?


How cautious can we afford to be about foreign investment?

chinamoney-1400x788

CapX, 31 January, 2017 (with Alex Manzoor)

So we all now know all about Theresa May’s industrial strategy for Britain. In addition to cutting red tape and regulation, the Prime Minister wants her Government to promote innovation, with the creation of a £4.7 billion fund to pay for research and by providing £556 million for the “Northern Powerhouse” project.

Naturally, the reception from the business community has been warm; they’re more than happy for an increase in public investment into the economy.

But the Prime Minister has yet to spell out her plan for dealing with foreign investment. And this is a key issue for her government. In an age of growing protectionism, she must carefully walk the line between encouraging inbound investment from foreign firms, and safeguarding Britain’s national security from those global companies working under state control.

As was the case with the funding for Hinkley Point, which the Prime Minister delayed over the summer, the greatest worry for many countries has been Chinese investment. This is partly because there has been a spike in Chinese investment abroad, but also because the nature of their investment tends to be in tech and critical national infrastructure sectors.

We are seeing barriers to their money going up worldwide. In August, for example, the Australian government blocked Chinese firms from bidding for a controlling stake in its largest electricity network. Then, in October, Berlin blocked a Chinese takeover of one of its largest chip manufacturers, following security concerns.

Shortly thereafter, the US Treasury took the unusual step of nullifying the part of the sale that included Aixtron Inc., an American-based subsidiary, following “credible evidence that the foreign interest exercising control might take action that threatens to impair our national security”.

It is true that an overly tough screening regime could militate against the Prime Minister’s new global objectives, particularly as we tout for business outside of the EU. But there must be some effort to screen investment in a regular and transparent manner. Only this would reassure foreign investors, British business, and our security services.

So how do we do it? Well let’s take a look at what other Western liberal democracies have done about investment security.

The best known example is the US Committee on Foreign Investment in the United States (CFIUS). Chaired by the US Treasury, this inter-agency grouping reviews transactions which might result in an American business being controlled by a foreign person or have an effect on US national security.

A transaction is first examined over a period of 30 days to ascertain its national security implications. The CFIUS then decides whether to approve the transaction or initiate an investigation.

An investigation would give the CFIUS another 45 days to decide whether to permit the transaction, impose conditions or refer the case to the President who can then prevent the transaction taking place. In 2012, President Obama cited national security risks when he blocked the Chinese-owned company Sany’s attempt to purchase wind farm projects in Oregon near the Naval Weapons System Training Facility where the military flies unmanned drones and electronic-warfare planes.

Similarly, Australia has its Foreign Investment Review Board (FIRB), which advises the Treasurer and the Government on foreign investment policy. Again, it does this largely by examining proposed investments in Australia and making recommendations.

The Treasurer can prohibit or impose conditions if there are concerns about the national interest as there were over two bids by the Chinese State Grid Corporation and Cheung Kong Infrastructure for the state-owned Ausgrid electricity company. Worth billions of Australian dollars, the bids were blocked by the FRIB citing “national security” concerns.

France also has a body to regulate inward investment. Before 2014, foreign investors in the technology, defence and betting sectors would have to notify the French Ministry for the Economy and Finance (MINEFI) before receiving authorisation. In 2014, the French government extended this oversight to the energy, transport, telecoms, water and health sectors – all areas of critical national infrastructure.

The new decree also ensured that non-EU investors’ proposals must pass muster under European Court of Justice case law, meaning that measures restricting the free movement of capital within the EU should be limited to the protection of public order and safety. The rejection of any transaction would  be on the basis of national interest, under which national security is a vital component.

It is not without irony that China has one of the most rigorous investment screening processes in the world, with a significant proportion of its economy off-limits to foreign investors.

Equally, why should the UK abandon its security or its values simply because Brexit is making growth a priority. Mrs May’s government is going to have to think carefully about its approach to economic growth and where money is going to come from.

That is why having a formal body or process, which carries out non-intrusive safeguards of investors into Britain’s economy would not be wild, suspicious, or paranoid. In fact, a brief glance around the world reveals that many other advanced economies have a process. It is just a question of common sense.

 

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